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What Do You Do When Income or an Asset Isn't Really Your Money?

By The Fastweb Team

August 31, 2017

I am a disabled parent who hasn’t worked since 2007. I am
currently on long term disability and have been ruled disabled by the
Social Security Administration. My child is heading off to college in
the fall and we are working on his FAFSA. My Social Security came
through in late November in a large lump sum due to back dating.
However, my long term disability has a clause that says I must give
this SSDI sum to them as an offset and therefore it isn’t really an
asset of mine. I am just waiting for them to send me my determination
letter so I can transfer the funds, which are currently in my savings
account. How do I account for this on the FAFSA? I don’t want them to
think that the sum is extra money cause it isn’t.
— H.R.

In most cases where a family argues that income or an asset isn’t
really their money, they actually do hold legal title to the money. For
example, when a grandparent transfers ownership of their home and
other assets to the parent in order to qualify for Medicaid, the
parent often argues that the money isn’t really theirs. But the parent
owns the assets and can use them for any purpose, even if the parent
feels a moral obligation to use the money for the benefit of the
grandparent. The grandparent wouldn’t be able to qualify for Medicaid
if the money was being held in trust for them. The family can’t claim
that the money isn’t the grandparent’s for Medicaid purposes and then
also claim that the money is really the grandparent’s for federal
student aid purposes.

Most college financial aid administrators will insist that the assets
be reported on the FAFSA because the parents hold legal title to the
money. They often look to see who is responsible for paying taxes
associated with the asset, such as property taxes on a home or income
taxes on the interest and dividends. Financial aid administrators
might allow a professional judgment adjustment for eldercare expenses
paid by the parents, but the asset must still be reported.

But when there is a legal or contractual obligation against the money,
it really isn’t the family’s money. For example, most long-term
disability insurance policies include clauses that treat SSDI payments
as an offset to the disability payments and require repayment if the
insured receives a retroactive lump sum payment of SSDI benefits.

Section 480(g) of the Higher Education Act of 1965 (20 USC 1087vv(g))
acknowledges this in its definition of net assets (emphasis added):
“The term ’net assets’ means the current market value at the time of
application of the assets (as defined in subsection (f)), minus
the outstanding liabilities or indebtedness against the assets.”
So not only is the value of an asset reduced by the amount of any debt
secured by the asset, but also by any liabilities against the
asset. If an insurance company has a legal claim on the money, the
amount of that claim will offset the value of the asset.

There are two approaches one can take to address such a situation,
since the FAFSA doesn’t provide the applicant with an opportunity to
explain any liabilities against an asset. One is to report the net
asset value on the FAFSA (i.e., after subtracting the liability to the
disability insurance company). The other is to report the savings
account balance on the FAFSA and ask the college financial aid
administrator for a professional judgment adjustment to compensate for
the liability to the disability insurance company.

Either approach carries some risk.

If the applicant reports the net asset value on the FAFSA and the
FAFSA is selected for verification, the college will question the
mismatch between the savings account balance and the amount reported
on the FAFSA. The applicant must be able to clearly document that the
money must be repaid to the long-term disability insurance
carrier. Even so, the college might still decide to disallow
it. College financial aid administrators like to see offsetting
transactions occurring in the same year. It is also a bit problematic
if the money was commingled with other funds, as opposed to being
deposited in a dedicated account.

If the applicant reports the savings account balance and asks for a
professional judgment review, it is possible that the college may deny
the request. Professional judgment reviews are subject to the
discretion of the college financial aid administrator, and decisions
to grant or deny an adjustment can sometimes be a bit arbitrary.

Either way it is possible that the college financial aid administrator
will disallow treating the liability to the insurance company as an
offset to the value of the savings account. But asking for a
professional judgment review may put the college’s financial aid
administrator in a more positive frame of mind than having the
financial aid administrator note a discrepancy during
verification. When a discrepancy is identified during verification,
colleges tend to be more suspicious and less likely to be
accommodating to the family.

The best approach, however, is to report the net asset value on the
FAFSA, consistent with the statutory requirements and the FAFSA
instructions. When in doubt, follow the rules. The family should also
call the college’s financial aid office and/or the Federal Student Aid
Information Center at 1-800-4-FED-AID (1-800-433-3243) before filing
the FAFSA to ask how to report the money. This will help allay
suspicions that the family was trying to hide the money. The family
should write down the response along with the date and time of the
call and the name of the person with whom they spoke. If the FAFSA is
selected for verification, the family should include a copy of these
notes along with an explanation that documents the calculation of the
net asset value and the liability to the insurance company.

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